When used properly, credit is a valuable tool for farmers and ranchers
We all live and work in a world influenced by money and credit. Both are integral to successful businesses. Let’s address some considerations regarding the impact of credit.
Credit is a valuable and powerful tool when used appropriately in the farming business. It offers a multiplier effect to your available money and resources.
Loans can be used for a multitude of purposes that can enhance your farming operation. Some include:
Short-Term – Credit cards for true short-term needs. Consider paying these off monthly to avoid high-interest costs. Don’t miss any opportunities when vendors allow an interest-free period. Short-term credit will enable you to use OPM (Other People’s Money) until you receive payment for goods sold.
Intermediate-Term Credit (IT) – This typically refers to loans exceeding a year but less than 7-10 years’ term. IT credit involves money for vehicles, tractors, implements and other equipment. The items should have a life span greater than the 7-10 loan term.
Long-Term Credit – These loans are for real estate and other capital improvements. While lenders will use longer terms for high-cost capital items like plant equipment, most long-term loans (5-30 years’ maturity) represent this credit class.
Each credit type and duration offer a financial solution for a prudent business decision-maker.
Considerations may include:
• Wants vs. Needs (you know how this works!)
• Purchase vs. Lease
• Should I borrow or rent?
• Expected use and longevity of the financed asset
• Depreciation/tax benefits
• Impact of cash flow due to repayment
• Impact on credit bureau report and scoring
• The Fair Credit Reporting Act (FCRA)
The use of credit and money are the lifeblood of most successful businesses. A well-constructed business plan can serve as a solid blueprint and base template for your business. This should include balance sheets, cash flow support, debt (repayment) scheduling and income forecasting. A Banker loves a good business plan!
Use Professionals
Attorneys, CPAs, Financial Advisors and other trusted contacts are important sources to help guide your credit decision process. Don’t be timid in utilizing these professionals. Also, your banker, lender and friends can share their opinions. Oftentimes, their advice is free.
Some good online money and credit resources include:
www.bankrate.com
www.nerdwallet.com
www.usda.gov
www.finance.yahoo.com
Don’t forget Banks, FCS, USDA, SBA and Credit Unions as sources for loans.
Interest Rates, etc.
We’re all experiencing the negative impact of the increasing interest rate environment. It’s not fun. However, let’s keep it in perspective. Many economists believe we’re nearing the end of this increasing cycle. We’ve seen a pause after 10 increases in the Federal Discount Rate. There are indications of a softening in the country’s inflation rate as well.
One way to address this rate situation is to stress test your financial profile. Again, your banker or other professional financial advisor can help with this. Look at what you perceive to be a “worst-case scenario” as it relates to your financial position. Then, develop a strategy to “weather the storm.”
Ken W. Knies is an agricultural and rural consultant. He holds a bachelor’s of science and arts from the University of Arkansas and a master’s of business administration from Webster University in St. Louis, Mo. He formed Ag Strategies, LLC as a business unit focused on
quality borrowers and lenders.
